The Financial Services Authority is closely monitoring developments at Goldman Sachs after one of its London-based traders was implicated by US authorities in a $1bn fraud case that hit Royal Bank of Scotland.

The link gives a domestic dimension to the lawsuit filed by the US Securities and Exchange Commission against Goldman Sachs. The case is the biggest sign yet that regulators on both sides of the Atlantic intend to pursue the architects of the exotic financial instruments that helped to cause the credit crunch. It is alleged that the American bank defrauded investors by encouraging firms to take bets on sub-prime mortgages it knew would turn sour.

The Liberal Democrat Treasury spokesman, Lord Oakeshott, said if the claims proved true it would demonstrate "the extent greedy bankers would go to, to pull the wool over the eyes of their customers and the regulator".

The accusations are levelled at Goldman Sachs, as well as French employee Fabrice Tourre, 31, who is now an executive director in its London office.

The US financial watchdog obtained emails sent to a friend in which Tourre jokes: "The whole building is about to collapse... only potential survivor, the fabulous Fab [Fabrice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

The SEC alleges that Goldman Sachs worked with the controversial US hedge fund Paulson & Co to set up the financial instrument called a collateralised debt obligation, which is built out of a specific set of risky mortgage assets.

It is alleged that Goldman knew the loans in the "Abacus 2007-AC1" vehicle were toxic, as did Paulson, which bet against it. Investors lost more than $1bn, while Paulson made a profit of a similar amount. RBS was the biggest victim, suffering losses of some $800m.

RBS has helped American officials to build the case against Goldman, but insiders say it is too early to say if the bank, now 84% owned by the taxpayer, will have grounds to mount its own legal action.

Goldman called the commission's charges "completely unfounded in law and fact" and said it would "vigorously contest them and defend the firm and its reputation".

Insiders at the bank believe the case, which it has been aware of for two years, is politically motivated. Despite the crisis, Goldman made record profits of $13.4bn last year, becoming a lightning rod for political outrage as it paid its bankers massive bonuses when it was seen to have benefited from the taxpayer-funded bailout of financial markets.

The FSA monitors most individuals who work in the Square Mile and its register shows Fabrice Pierre Tourre has been authorised to work for Goldman Sachs International in London since November 2008. He was working for Goldman in its New York offices at the time of the alleged offences and has not been suspended following the allegations.

He is still authorised to work with Goldman's London-based clients and has the individual reference number FPT01004. The SEC has been interviewing people who structured Goldman mortgage deals for months, but the products were rife on Wall Street and analysts said the legal action could be the tip of the iceberg.

"There is rising public appetite for punishment of the guilty parties that caused the credit crisis," said Brad Hintz of the US brokerage Bernstein.